Question

2. As the employee in charge of accounts receivable, Ethan has a lot of responsibility.

Not only does he receive all cash, but he also records the transactions for accounts
received. He has often asked Mitchell if this is a good idea, as it seems like a lot of
responsibility for one person. Mitchell just reminds him that receiving cash and
recording transactions for cash received are both responsibilities of an accounts
receivable clerk.
How does this constitute a violation of internal control?

Answer 1

Ethan's control over both receiving and recording cash transactions constitutes a violation of internal controls due to the lack of segregation of duties, which increases the risk of errors and fraud. In contrast, Noel's actions exemplify effective oversight within an organization's internal control system.

Step-by-step explanation:

The scenario described with Ethan being responsible for both receiving cash and recording transactions is a violation of internal control principles. It poses a significant risk; proper internal control systems should have separation of duties. This means that no one individual should control all aspects of a financial transaction to reduce the risk of errors or fraud. Segregation of duties helps to ensure that if errors or irregularities occur, they are more likely to be detected. In this case, the potential for both unintentional mistakes and intentional misappropriation of funds is higher because the same person is handling cash and recording.

In the related scenario provided in the reference information, Noel serves as an effective checkpoint in the organization's internal control system by identifying an overpayment error. Noel's proactive approach in using multiple communications channels to report the problem shows the importance of responsive communication and oversight in internal controls.